If it's good for us and good for the planet, it must be good for the bottom line. So goes the assumption behind the notion that firms will take their own measures to reduce carbon emissions because those investments pay off.
Environmental advocates and some businesses often claim that energy-saving technology and strategies to reduce greenhouse gases cut costs and reap rewards in "green goodwill." Not so, according to research by Tuck finance professor Karin Thorburn and Dartmouth environmental studies professor Karen Fisher-Vanden. Looking at the stock market's reaction to announcements by companies that join the U.S. EPA's Climate Leaders program, they found that those companies' share prices dropped significantly. The program is a voluntary government–industry partnership in which firms commit to a long-term reduction of their greenhouse gases. For the 46 sample firms that joined, the total loss in market value was $16 billion.
"My definition of green goodwill is that consumers would prefer to buy from a company that has a more environmentally friendly product," says Thorburn. "But given what we've seen in the data, I don't think that customer demand is there."
Firms that join Climate Leaders make a commitment to such measures as reducing energy, using renewable sources, decreasing business travel, or buying carbon offsets. Of the sample group Thorburn considered, the average firm set a goal of a 17 percent emissions reduction. On this announcement, stock price plummeted even farther, with a greater price decline for more aggressive goals. The study also looked at membership in Ceres, a network of business and environmental groups that encourages the adoption of sustainability principles but does not insist on a specific reduction goal. Stock returns were largely unaffected by Ceres membership.
While Climate Leaders includes such well-known participants as Gap Inc., IBM Corporation, and Pfizer Inc., its total membership of 172 firms counts for less than two percent of U.S. publicly traded firms. Thorburn points out that if it were profitable to be green, all companies would be. Two firms, Polaroid and Norm Thompson, left the Climate Leaders program shortly after going private, further supporting the case. Environmental friendliness, she says, is "a classic example of an externality."
Not everyone wants to give up the myth of green goodwill, and Thorburn argued with a New York Times reporter who held that the losses were only short term. But Thorburn says evidence shows the stock market usually tends to see the big picture. For example, when companies announce investments in research and development, stock prices generally go up in anticipation of future cash flows.
In fact, this research should be seen as the best tool for environmentalists to push for regulation. Unlike many Western nations, the U.S. has not ratified the Kyoto Protocol, which requires reductions of national carbon footprints. The current each-to-his-own approach, Thorburn says, clearly doesn't work. The U.S. Senate may take a new direction when it debates a climate change bill involving a cap-and-trade scheme.
A native of Sweden who came to Tuck 10 years ago, Thorburn points out that the U.S. is far behind Europe in sustainable activity. There, high taxes on oil and gas mean that most new cars are hybrid or diesel, and thermal heating systems are becoming common in homes.
In the U.S., such investments remain exceptions, evidenced by her own actions. "That's a really good question," she says, when asked whether she tries to be green. "I mean, I drive a small car, not an SUV. But I must say, no."
